Company Overview: FTI Consulting, Inc. (NYSE: FCN) is a business advisory company that offers expert consulting services throughout 26 foreign countries with more than 4,200 employees. The company has a team of extremely skilled professionals, who deliver problem-solving and technology services primarily to major corporations, financial institutions, and law firms. The company's client list comprises a large percentage of the Fortune 1000 companies, Fortune 500 companies, FTSE 100 companies, as well as the major banks and the top 100 law firms across the globe. The company has 5 key business segments, namely (a) Corporate Finance and Restructuring, (b) Strategic Communications, (c) Forensic and Litigation Consulting, (d) Technology, and (e) Economic Consulting.

FCN Details

Geographical Expansion & Buyout Synergies Aids FCN: FTI Consulting, Inc. (NYSE: FCN) is a business advisory firm devoted to aid companies in managing change, lessen risk and resolve disagreements through its advisory services of financial, operational, political, legal, and regulatory, reputational and transactional, on a global basis. The company enjoys a strong global footprint. FCN’s international operations aid to expand its geographic trajectory and add to its top-line growth. In 2019, the company derived ~34% of total revenues from its international businesses. The industrial and geographical diversification of its customer base (across the United States and internationally) helps to lessen the risk of material losses. The company’s international presence remains solid and is expected to expand its geographic reach, going forward.

Corporate finance and restructuring services are likely to gain traction owing to robust demand in various verticals such as oil and gas exploration, financials, automotive, production and drilling, department stores, restaurants, healthcare, telecommunication services, & and entertainment venues. The company has a diversified business model, which bridges the gap between distinct issues like damage assessment, economics, accounting, statistics, finance, and industry.

The company’s acquisition of certain assets of Delta Partners is likely to strengthen FCN’s strategy-consulting offering and enhance its business-revolution and transaction abilities. Further, the company recently stated that it has unveiled the GNI APAC Subscriptions Lab, in collaboration with the Google News Initiative (“GNI”) and the World Association of News Publishers (“WAN-IFRA”). The four-month program is expected to aid eight distinct news publishers from the Asia Pacific region, thereby bolstering FCN’s digital subscriptions capabilities and grow revenue base.

Over the period of FY17-FY19, the company’s total revenue improved from $1,808 million in FY17 to $2,353 million in FY19, posting a CAGR of 14.1%. Net income grew from $108 million to $216.7 million in FY19, witnessing a robust CAGR of 41.7% over the same period. The company has a steady cash flow business model, which boosts business operations, capital expenditures and the ability to service the indebtedness and carry out its growth plans. Going forward, the company’s distinguished expertise, client relationships and goodwill, along with its successful track record and geographic diversity are likely to drive operational and financial efficacy in the everchanging corporate environment.

Revenues & Earnings Trend (Source: Company Reports)

The company remains on track to make strategic investments in hiring competent professionals and, training and promoting them. Robust staff deployment is a key driver of FCN’s revenues, which increased 16% year over year in FY19. Though such investments raise expenses and weigh on the bottom-line in the near-term, these are expected to help the company in the long run. The company is also involved in enhancing its underlying competencies, particularly in investigation, disputes, and restructuring, along with the continuous focus on business transformation, cybersecurity, and corporate reputation. This, in turn, is aiding the company to satisfy the changing requirements and needs of clients.

2QFY20 Business Highlights for the Period ended 30 June 2020: During the quarter, the company reported adjusted EPS of $1.32, down 23.7% from the prior corresponding period. The bottom-line was negatively wedged by an 18.2% rise in higher variable compensation and higher billable headcount, partially offset by lower selling, general and administrative expenses, and lower effective tax rate. Revenues for the period increased marginally 0.3% year over year and came in at $607.9 million. This increase in top-line can primarily be attributed to higher demand in the Corporate Finance & Restructuring segments. Adjusted EBITDA in 2QFY20 declined 22% on pcp and stood at $75.8 million.

Segmental Highlights: During the quarter, revenues from Corporate Finance & Restructuring (40.5% of total revenue) came in at $246 million, up 29.5% from the prior corresponding period. The increase was on the back of robust requirement for restructuring, and business renovation and transaction services. Revenues from Forensic and Litigation Consulting (17.5% of total revenues) stood at $106.4 million, a decline of 27.1% year over year on the back of lower demand from investigations and disputes services. Revenues from Strategic Communications (9.4% of total revenues) were down 3.8% on pcp and came in at $56.9 million, due to a $1.9 million fall in pass-through revenues. Technology’s (7.7% of total revenues) revenue during the quarter came in at $47.1 million and dropped 15.4% year over year due to lower demand for global cross-border investigation, and litigation services. Lastly, revenues from Economic Consulting (24.9% of total revenues) stood at $151.1 million, down 2.6% year over year.

2QFY20 Key Highlights (Source: Company Reports)

Geographical Contribution: During the quarter, revenues from North America, EMEA, Asia Pacific and Latin America contributed 64.3%, 28.1%, 6.3% and 1.3%, respectively, of total revenues. Although, revenues from North America and Latin America declined 4.8% and 4.5%, respectively, year over year, revenues from EMEA, and Asia Pacific region went up 14.2% and 1.1%, respectively, on pcp.

Geographical Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Highlights: The company exited the period with cash and cash equivalents of $304.2 million, up from $223.1 million as at 31 March 2020. Total debt amounted to $351.3 million compared with $366.2 million witnessed at the end of the previous quarter. During the quarter, net cash generated from operating activities amounted to ~$153 million and capital expenditure amounted to $5.2 million. Free cash flow stood at $147.3 million in 2QFY20. The company repurchased 470,853 shares worth $51 million during the quarter.

Balance Sheet Highlights (Source: Company Reports)

Key Recent Updates:

1. On September 22, 2020, the company announced that it has appointed Todd Mello as a Senior Managing Director and Leader of the Valuation Services group, thereby investment in its healthcare valuation competences.
2. On September 16, 2020, the company launched the Real Estate Business Transformation for real estate owners and users. The latest offering will aid companies better handle the fast-regulated change taking place across the real estate industry.
3. On September 14, 2020, the company appointed Colin McCafferty as a Senior Managing Director to its wholly-owned investment banking subsidiary, FTI Capital Advisors.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 52.82% of the total shareholding. The Vanguard Group, Inc., and Fidelity Management & Research Company LLC hold the maximum interests in the company at 10.21% and 8.51%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: FCN reported Jun’ 2020 quarter’s operating margin at 10.8%, higher than the industry median of 9.4%. Net margin, in the same time span, stood at 7.9%, higher than the industry median of 5.5%. June’20 debt to equity ratio stood at 0.21x, lower than the industry median of 0.58x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: Increasing competition and risks relating to cybersecurity may put revenues and margins under pressure. Further, the ongoing macroeconomic and trade worries due to the COVID-led outbreak might impact demand for consulting services in the near to mid-term. Further, changes in capital markets, M&A activity, legal requirements, monetary or geopolitical disruptions, might reduce demand for FCN’s offerings.

What to Expect: For FY20, the company expects adjusted EPS (earnings per share) to be in the ambit of $5.50-$6.00. Revenues for FY20 is likely to be in the range of $2.45 billion and $2.55 billion.  It is worth mentioning that consulting services is one of the slightest-influenced industries, during the coronavirus led disruption. The reason being that despite a volatile situation, businesses have expanded their search for information and guidance that can assist them to safeguard employees and stay close to clients and stockholders. The company also remains on track to build a profitable business with sustainable underlying growth, irrespective of economic conditions. The company’s investments in key growth areas along with maintaining a healthy balance sheet and strong cash flows, with an ongoing commitment to return capital to its shareholders are key positives.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of FCN closed at $105.97 with a market capitalization of ~$3.88 billion. The stock made a 52-week low and high of $100.57 and $144.1, respectively, and is currently trading below the average of its 52-week trading range. The stock went down ~8.16% in the last three months. The company strategizes to grow organically through higher headcount while improving its market share to provide clients an attractive and evolving suite of services across the segments as well as the industries and geographic regions in which the company operates.  On a technical analysis front, the stock has a support level of ~$100.58 and a resistance level of ~$115.35. Considering the above factors, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method. For this, we have considered peers like Huron Consulting Group Inc (NASDAQ: HURN), Franklin Covey Co (NYSE: FC), CBIZ Inc (NYSE: CBZ), to name a few, and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $105.97, down 0.96% as on 30 September 2020.

FCN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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